Why it could get even worse for this troubled sector

Auto stocks have been headed in reverse. Over the past six months, automobile manufacturers have been the third-worst-performing subsector in the S&P 500, falling 8.2 percent even as the index rose by 11.3 percent. But according to one master technical analyst, it will get even worse for car companies before it gets better.

Carter Worth, the chief market technician at Sterne Agee, is particularly concerned that auto stocks have underperformed housing stocks. Both cars and houses represent major household purchases, but the more mobile products have lagged far behind.

"Notice the lag between how cars are performing and houses are performing," Worth said.

"In the auto index, what I see is a well-defined trend, which you see over and over, and finally we've broken trend, and now we've thrown back to the underbelly of the line. That's a very difficult spot to be in."

For traders interested in making bearish bets, Worth draws their attention to shares of Ford.

Ford was following along a "well-defined trendline," but has now broken trend, the technician said.

"If you want to talk about a topping formation, whether it's head-and-shoulders, what have you, this is a heck of a neckline, and the presumption is, we've got a break here," Worth said. "This is not good. It's not good for Ford, and it's not good for the group."

For Michael Khouw of Dash Financial, the fundamentals for Ford also look relatively weak.

"If you see a rising rate environment," as many anticipate, that would not seem to lead to "a lot of consumers running out and buying cars. Or taking advantage of cheap financing," Khouw said.

A recent report by Experian Automotive found that Americans borrowed a record amount to buy cars in the fourth quarter, partially thanks to low rates for loans. As rates rise, however, that story could change.

Khouw goes on to argue that while Ford is trading at just 11 times its anticipated earnings over the next 12 months, that is due to the recent strength of the economy, and cyclically adjusted companies have to be assessed differently.

"This is a company that lost more than $3.30 per share in the downturn. If you add it all up, the 10-year cyclically adjusted earnings is about 50 cents a share, and it's trading about 30 times that number," Khouw said. "So if you take a cursory look, it looks good. Take a deeper look, maybe not so good."

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